Rising interest rates, car prices trigger peak in US auto loan delinquencies

Americans are falling behind on their car payments at a rate not seen in about 30 years. The National Automobile Dealers Association has warned that a combination of recent “surging interest rates” and “higher vehicle prices” will continue to “put further pressure on vehicle affordability” going forward, hampering the ability of consumers to purchase a car.

After the Federal Reserve slashed interest rates to zero during the COVID-19 pandemic, only 2.6% of subprime auto loans, issued to borrowers with below-average credit scores, were at least 60 days past due in May of 2021. However, with increases to average car prices and interest rates back on the rise, that number has now jumped to 6.1% of borrowers, a total not seen since 1994. This comes as relief for those in debt may still be a long ways off, with Federal Reserve officials now predicting that higher interest rates will continue through 2026.

“In the auto industry right now, interest rates are public enemy No. 1 – the leading factor holding back business,” said Jonathan Smoke, chief economist at Cox Automotive. “Limited Inventory was the leading factor one year ago, but now it’s interest rates, the economy and credit availability, which all make affordability more challenging. Ultimately, these are not good signs for demand continuing to be strong or improving in the fourth quarter.”

In September, the typical new vehicle loan interest rate rose to a new peak, and those with bad credit could be faced with rates upwards of 20% according to Bankrate.

Edmunds, an automotive inventory and information resource, reported more than 1 in 6 people who financed a vehicle in the second quarter of 2023 have a monthly payment of $1,000 or more, another all-time high. That has in part put the average new car payment up by almost 40% over the past five years.

“The double whammy of relentlessly high vehicle pricing and daunting borrowing costs is presenting significant challenges for shoppers in today’s car market” said Ivan Drury, director of insights at Edmunds. “The Federal Reserve’s recent pause in interest rate hikes, unfortunately, didn’t offer much relief for consumers, and hints at further raises later this year mean auto loan rates could even continue to increase.”

Meanwhile, automobile costs are also hindering consumers ability to afford their vehicle payments.

According to Kelley Blue Book, 17 of the 23 vehicle categories showed a pricing increase from March 2022 to March 2023. During the start of this year, average new vehicle prices peaked at nearly $50,000, a sharp increase from the  $37,876 average seen in 2021. Cox Automotive/Moody’s Analytics Vehicle Affordability Index found that as of September, the total median weeks of income needed to purchase the average new vehicle stands at over 42 weeks, close to one year’s worth of pay.

“New-vehicle affordability continues to be much worse now than it was a year ago, when prices were notably lower and incentives were higher,” Cox Automotive said in a news release. “The market has faced high interest rates, real affordability issues, and ongoing inflation, which could have led to large declines in vehicle sales.”

Over the summer, industry experts like Brain Moody, executive editor of AutoTrader.com, said that while the current state of car loan delinquencies was concerning, it had not hit the point of becoming alarming. Yet, as these trends have continued, others have now expressed fears that continued higher rates of subprime borrowers falling behind on their auto payments could precede an economic bubble burst.

“It’s going to come, and it’s going to bite us. Now, we’re selling the cars for so much more, and financing for longer, at a much higher interest rate. There are some challenges coming down the pike,” said Pete Kesterson, general manager of the Don Beyer Volvo auto dealership group in Virginia.

Margaret Rowe, senior director at Fitch Ratings, said the trends of subprime borrowers can often be the first indication of “where we start to see the negative effects of macroeconomic headwinds.”

The housing market crash of the late 2000s was driven by subprime borrowers being unable to make their mortgage payments, further fueling fears the auto market may be heading toward a similar result.